UK consumer perceptions of inflation vs the official CPI stats

Last week, the Bank of England published their latest “Inflation Attitudes” survey results for May 2015. It showed that the median Brit thought that prices had risen 2.2% over the last year. That is very different to the latest official CPI figure of -0.1% published in April 2015. Just 6% of the UK population agrees with the official numbers and thought that prices had actually declined in the last year.

Consumer perception of inflation vs CPI

The above chart compares the historical data on median inflation perceptions since November 1999 with the ONS’s estimate of CPI. It shows that consumers almost always think that the real inflation rate is above CPI. On average over the last 15 years, they have guessed it to be 1% higher. However there is some evidence that the difference might be getting larger more recently. The average difference since 2012 has been 1.75%.

So why is there such a big disparity?

ONS have looked into this before and there are a number of articles published about it (for example here in 2010). They like to highlight that consumers’ perceptions are often inaccurate for a number of reasons, i.e.

  1. Individuals’ inflation rates may be different as they consume different amounts of products to the average CPI index. Indeed as the CPI weights are expenditure related, they reflect the spending of the rich far more than the average person –  see here.  If you look at the detailed tables on inflation perceptions, you’ll notice it is the C2DE’s that generally perceive higher rates of inflation, so there might be some slight effect here.
  2. ONS also highlight that people notice price increases more than price reductions (Brachinger, 2005). In addition, individuals are also more likely to remember price changes for items bought frequently (Antonides, Heijman and Schouten, 2006). Although there maybe something in the former, the latter has now been disproved. In the last year food prices have declined 3% and petrol is down 16%. Both of these are frequently bought items and probably key in framing inflation opinions. However consumer perceptions of inflation are still above 2%.
  3. Finally, ONS say that the media is key in forming inflation perceptions with over half of all respondents of the Bank of England Inflation Attitudes Survey (2010) saying it was either ‘very important’ or ‘important’ when forming their views. How is it then when the media is full of headlines of CPI deflation (and even RPI is 0.9%), that most people think inflation is still above 2%?

The most obvious answer is that 94% of the UK population are probably not wrong and inflation is actually higher than reported in CPI.

As is clear from the graph above, most people think inflation is at least 1% higher than the published stats. Interestingly, this is almost exactly the same error that I have calculated using a completely different method – see here.

To briefly recap the real reasons that CPI under-estimates true inflation. These are:

My guess at the underestimation of true inflation is around 1 to 1.5 per cent – see table below. The exact amount is variable and there is no simple consistent adjustment that can be made to determine it.

CPI underestimation

Source: ONS for housing and geometric means effects. Author best estimates for substitution effects.